What is Provisional Tax?

Provisional tax is a way of paying your income tax in instalments throughout the year, rather than in a lump sum at the end of the tax year.

When Do You Need to Pay Provisional Tax?

You must start paying Provisional Tax in the year after your tax bill (Residual Tax) exceeds $5,000.

Ways to Calculate Provisional Tax:

• Standard Option: Straightforward but may be inaccurate if your income fluctuates.
• Ratio Option: Aligns your tax payments more closely with your income.
• Estimation Option: Estimate your income for the current year and pay tax based on that. Risky if you underestimate — penalties may apply.
• Accounting Income Method (AIM): Based on the profit reported from Xero.

Recommendations:

We usually recommend the standard option if your income is stable. If no choice is made, this will apply by default.

For fluctuating incomes, especially if you anticipate a decline, we recommend the ratio option. This must be chosen by March 31 for the upcoming tax year — contact us urgently to discuss.

If you expect lower income and didn’t choose the ratio option, you may estimate — but be cautious. Underestimating can trigger a 5% penalty. It’s also hard if income is low early and high later — you might need to prepay before earning it.

Scenarios for Income Drops:

• Life-work balance adjustments (e.g., booking fewer babies per month)
• Midwives taking maternity leave
• Extended leave or holidays

Payment Dates for Midwives Filing GST Two-Monthly:

• First Instalment: August 28
• Second Instalment: January 15
• Third Instalment: May 7

For six-monthly GST returns, provisional tax payments align with GST return due dates.

First-Year Payments:

Start dates depend on when we file your first tax return. We have an extension of time for one year, so we can delay provisional tax if needed.

Tax Advice:

Tax laws and obligations can be complex. Consulting with us ensures tailored advice to help you meet all requirements and avoid penalties.

We are your local accountant… just a phone call away… Zoom to meet.